Which Options For You?

When considering the options market the trader faces the choice of either the local Australian market or the U.S. Options market. This is a not such an obvious choice as many might think. There are strong reasons why the matter needs to be at least debated. There are a number of considerations but before we look at them we can quickly deal with the some of the basic differences between the two markets:

Contract Size: In USA this is 100 shares per contract compared with Australia where it is 1,000. Thus the cash cost to use options in Australia will be typically about twice that of USA, taking into account the higher priced USA stocks and the exchange rate difference.

Expiry:In USA this is always the last Friday of the month whereas in Australia it is the Thursday before the last Friday – thus not necessarily the last Friday as was the case in July.

Strike/Exercise price: In USA they are $2.5 for < $25 shares and for shares >$25 it is $5 increments compared to Australia where they are in increments of 10c, 25c, 50c, or $1.00 depending on the value of the share.

The above are very minor issues but there are a number of major ones to take into consideration:

Market Size: Australia has 67 Optionable shares but there are only about 10 that have worthwhile volume – the major banks plus majors such as NCP, BHP, TLS and a few others. Volume may or may not be an issue depending on the options strategy you are pursuing. In the USA there are about 2700 Optionable stocks – it is a huge market. And even within USA options there are numerous call/put ranges from which to select. This is not surprising given the size of USA financial markets, population etc.,

Strike Months: US options generally go out a couple of years with plenty of months in which to obtain “fills” whereas here it is generally about 12 months with some exceptions but also with fewer months in between.

Volume: Australian daily volume is about 65,000 puts/calls whereas one of the main US exchanges - CBOE - alone has a daily volume of 800,000 puts/calls.

Liquidity: Volume is the single greatest determinants for liquidity and it follows that it is easier to move in and out of the USA markets than the Australian market where you may have to trade off significant slippage to obtain a sale especially if the market is trading against you.

Volatility: Without doubt volatility is an options player’s best friend and the USA is a very volatile market compared to our market which is a much more controlled and subdued market – which quality can of course be a benefit for other investment styles.

Time Difference: This could be an issue for some traders but in my view it is actually a positive. If you are trading Australian options and are awake during our time zone as most of us are, it requires considerable discipline to resist the temptation to “peep” at your positions during the day. If you are trading the USA markets and thus asleep in their time zone, then there is less chance to be constantly watching. One is better off in either case avoiding intraday surveillance, as once you trade you need to give it time to work for you. Give yourself a fairer chance of being correct by going out at least 2 months rather than sweating on being right in the immediate term.

It may appear that the above favours trading USA markets – not necessarily. I don’t have a strong view either way. I can also see there are excellent reasons to trade one’s local markets:

Covered positions: If you hold physical shares then you may be using options as a risk management strategy – then you will understandably trade the Australian options and this would be a commendable approach.

Watch One Market: It is time consuming enough watching one market, let alone two!

Broker Assistance: Even if you don’t want to use a local broker for advice then you can at least use them to help you place your trade and avoid any catastrophes in doing so. Mind you it is essential here to be confident that the broker is an option specialist and does in fact know what he is doing.